{"id":80084,"date":"2015-10-26T04:39:25","date_gmt":"2015-10-26T08:39:25","guid":{"rendered":"http:\/\/countingpips.com\/?p=80084"},"modified":"2015-10-26T05:45:39","modified_gmt":"2015-10-26T09:45:39","slug":"valeant-woes-prove-dangers-of-reaching-for-yield","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/10\/valeant-woes-prove-dangers-of-reaching-for-yield\/","title":{"rendered":"Valeant Woes Prove Dangers of \u201cReaching for Yield\u201d"},"content":{"rendered":"
October 26, 2015<\/div>
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By WallStreetDaily.com<\/u><\/a> \"Valeant<\/p>\n

By Alan Gula<\/a>, Chief Income Analyst <\/em><\/p>\n

When we look back on this period in the financial markets, how will it be remembered?<\/p>\n

Well, I believe that the last couple of years will largely be defined by the \u201creach for yield\u201d and exuberance in the high-yield bond market.<\/p>\n

It\u2019s become common to dismiss the problems in high-yield land because they\u2019re seemingly limited to the energy sector. However, the market is slowly going to realize that the high-yield debacle isn\u2019t \u201ccontained.\u201d<\/p>\n

And last week, the junk bond market got a jolt.<\/p>

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A Nasty Shock for Yield-Chasing Valeant Investors<\/h2>\n

As you probably know, shares of Valeant Pharmaceuticals\u00a0International Inc<\/a>.\u00a0<\/strong>(VRX<\/a>) got hammered last week when the company became the target of fraud allegations.<\/p>\n

As for the company\u2019s fixed-income offerings\u2026 the 6.125% bonds due in 2025 traded down to $83.50 on October 22. As recently as early August, those same bonds traded for more than $104.<\/p>\n

The following table shows some of the largest U.S. high-yield issuers this year. Valeant actually tops the list.<\/p>\n

\"Top<\/p>\n

It probably comes as a surprise to many Valeant equity traders and investors that the company has a sub-investment grade credit rating.<\/p>\n

Now, Valeant may or may not default. But what\u2019s clear is that the mispricing in the high-yield debt market allows companies like Valeant to lever up with impunity.<\/p>\n

Equity shareholders are also complicit for having failed to punish companies with too much leverage.<\/p>\n

Whether it\u2019s a sharp decline in oil prices, corporate malfeasance, an economic downturn, or some other unforeseen event, the risks that may cause a default are manifold.<\/p>\n

And these risks pose an even greater threat to investors in highly-levered companies.<\/p>\n

Nonetheless, investors are flooding back into junk bonds.<\/p>\n

Like Lambs to the Slaughter<\/h2>\n

So far in October, the SPDR Barclays High Yield Bond ETF<\/strong> (JNK<\/a>) and the iShares iBoxx High Yield Corporate Bond ETF<\/strong> (HYG<\/a>) have experienced inflows of $2.1 billion and $1.7 billion, respectively.<\/p>\n

According to Lipper, high-yield funds saw their largest weekly inflow since October 2011 this month.<\/p>\n

As you can tell, the herd mentality driving the reach for yield lives on. Like lambs to the slaughter\u2026<\/p>\n

The energy sector was simply the first to get hit, but now the credit cycle has turned. In other words, credit availability is starting to dry up.<\/p>\n

Before it\u2019s all said and done, every<\/em> sector\u2019s high yield bonds will be a disaster. At that point, most high-yield bonds will actually be high<\/em> yielding because the default rate will be shocking.<\/p>\n

It will also be a time to load up on this risky segment of the fixed-income universe.<\/p>\n

Unfortunately, that opportunity is still some way off yet.<\/p>\n

Safe (and high-yield) investing,<\/p>\n

Alan Gula, CFA<\/p>\n

The post Valeant Woes Prove Dangers of \u201cReaching for Yield\u201d<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com By Alan Gula, Chief Income Analyst When we look back on this period in the financial markets, how will it be remembered? Well, I believe that the last couple of years will largely be defined by the \u201creach for yield\u201d and exuberance in the high-yield bond market. It\u2019s become common to dismiss the […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-80084","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/80084","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=80084"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/80084\/revisions"}],"predecessor-version":[{"id":80094,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/80084\/revisions\/80094"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=80084"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=80084"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=80084"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}